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1、Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,3-1,Chapter 3 Measuring Yield,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,3-2,Learning Objectives,After reading this chapter, you will understand how to calculate the yield on any investment how to calculate th
2、e current yield, yield to maturity, yield to call, yield to put, and cash flow yield how to calculate the yield for a portfolio how to calculate the discount margin for a floating-rate security the three potential sources of a bonds return,Copyright 2010 Pearson Education, Inc. Publishing as Prentic
3、e Hall,3-3,Learning Objectives (continued),After reading this chapter, you will understand how to calculate the yield on any investment what reinvestment risk is the limitations of conventional yield measures how to calculate the total return for a bond why the total return is superior to convention
4、al yield measures how to use horizon analysis to assess the potential return,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,3-4,Computing the Yield or Internal Rate of Return on any Investment,The yield on any investment is the interest rate that will make the present value of th
5、e cash flows from the investment equal to the price (or cost) of the investment. Mathematically, the yield on any investment, y, is the interest rate that satisfies the equation. where P = price of the investment, CF = cash flow in year t =1,2,3, N, y = yield calculated from this relationship (and a
6、lso called the internal rate of return), N = number of years.,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,3-5,Computing the Yield or Internal Rate of Return on any Investment (continued),Absent a financial calculator or computer software, solving for the yield (y) requires a t
7、rial-and-error (iterative) procedure. The objective is to find the yield that will make the present value of the cash flows equal to the price. Keep in mind that the yield computed is the yield for the period. That is, if the cash flows are semiannual, the yield is a semiannual yield. If the cash fl
8、ows are monthly, the yield is a monthly yield. To compute the simple annual interest rate, the yield for the period is multiplied by the number of periods in the year.,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,3-6,Computing the Yield or Internal Rate of Return on any Investm
9、ent (continued),Special Case: Investment with Only One Future Cash Flow When the case where there is only one future cash flow, it is not necessary to go through the time-consuming trial-and-error procedure to determine the yield. We can use the below equation:,Copyright 2010 Pearson Education, Inc.
10、 Publishing as Prentice Hall,3-7,Computing the Yield or Internal Rate of Return on any Investment (continued),Annualizing Yields To obtain an effective annual yield associated with a periodic interest rate, the following formula is used: effective annual yield = (1 + periodic interest rate)m 1 where
11、 m is the frequency of payments per year. To illustrate, if interest is paid quarterly and the periodic interest rate is 0.08 / 4 = 0.02, then we have: effective annual yield = (1.02)4 1 = 1.0824 1 = 0.0824 or 8.24%,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,3-8,Computing the
12、 Yield or Internal Rate of Return on any Investment (Continued),Annualizing Yields We can also determine the periodic interest rate that will produce a given annual interest rate by solving the effective annual yield equation for the periodic interest rate . Solving, we find that periodic interest r
13、ate = (1 + effective annual yield )1/m 1 To illustrate, if the periodic quarterly interest rate that would produce an effective annual yield of 12%, then we have: periodic interest rate = (1.12)1/4 1 = 1.0287 1 = 0.0287 or 2.87%,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,3-9,
14、Computing the Yield or Internal Rate of Return on any Investment (continued),Annualizing Yields We can also determine the periodic interest rate that will produce a given annual interest rate by solving the effective annual yield equation for the periodic interest rate . Solving, we find that period
15、ic interest rate = (1 + effective annual yield )1/m 1 To illustrate, if the periodic quarterly interest rate that would produce an effective annual yield of 12%, then we have : periodic interest rate = (1.12)1/4 1 = 1.0287 1 = 0.0287 or 2.87%,Copyright 2010 Pearson Education, Inc. Publishing as Pren
16、tice Hall,3-10,Conventional Yield Measures,Bond yield measures commonly quoted by dealers and used by portfolio managers are: Current Yield Yield To Maturity Yield To Call Yield To Put Yield To Worst Cash Flow Yield Yield (Internal Rate of Return) for a Portfolio Yield Spread Measures for Floating-Rate Securities,Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall,3-11,Conventional Yield Measures (continued),1) Current Yield Current
